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Risk |
Risk
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TALK
This note is for the concept of risk as understood by laymen and mathematicians.
TODO
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Relocate profession specific content to risk-management.
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If #In Cost Estimation's content needs to remain, and it isn't suited for actuarial-science-for-construction-estimating, another cross-topic risk-management-for-construction-estimating will be necessary. I suspect that with some edits it will be most appropriate for actuarial-science.
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Risk, in common parlance, is the chance that something "bad" will happen. As such, it is generally understood as a binary, win/loss relationship.
This model of discrete probability is ubiquitous of project-management-tm, and is the sort assumed when using risk registers.
[!example] This scope of work presents a 1 in 10 chance of significant delay.
In Cost Estimation
The prior model is well suited to project management, which (being reductive) cares about why's, where cost estimation only cares about the bottom line.
It is generally not useful for construction cost estimation. Potential impacts sufficient to warrant documenting should usually just be excluded.
Cost estimators usually understand risk in terms of continuous probability.
The reality of construction cost estimation is that there are no certain costs. Traditional construction estimates give a false impression of certainty because they operate on and return fixed values. With the most generous interpretation, they can be said to evaluate cost in the most likely case of each axis of uncertainty.
[!info] Escalation Projecting recent pricing to a later date of purchase based on anticipated market conditions.
[!aside] ISO 31000 [ISO 31000](ISO 31000:2018 - Risk management — Guidelines) defines risk as the "effect of uncertainty on objectives" therefore referring to positive consequences of uncertainty, as well as negative ones.
The standard gives a list on how to deal with risk:
- Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk
- Accepting or increasing the risk in order to pursue an opportunity
- Removing the risk source
- Changing the likelihood
- Changing the consequences
- Sharing the risk with another party or parties (including contracts and risk financing)
- Retaining the risk by informed decision
Risk Tolerance
Determining risk tolerance is a task usually appropriated by executives (often based on gut-feel), but that is better determined mathematically.
Risk Analysis and Management
Risk Registers
Risk Registers are a standard method of documenting risk. They are a hallmark of project-management-tm practice.